Brazil’s Bonds, Currency Take Renewed Hit

Brazil’s bonds, stocks and currency led declines across emerging markets on concern Latin America’s largest country is losing access to capital markets and may have trouble paying its debts.

Brazil’s 8% bond maturing in 2014 fell 1.37 cents to 57.13 cents on the dollar, yielding almost 21%, up from 20.3% on Thursday, according to J.P. Morgan Chase & Co. Friday’s yield on the benchmark bond was the highest since early 1995, in the wake of Mexico’s currency crisis.

The Bovespa stock index dropped 4.7% to 10,397.55, its lowest since Oct. 9. The real dropped 1.2% to 2.83 per dollar, its weakest since Sept. 21.

“There’s contagion across emerging markets,” said Carlos Rojas, money manager at Rimac Internacional in Lima. “Even Mexico and Russia had the flu.”

Investors, unnerved by Argentina’s $95-billion default in December, are selling Brazilian securities on concerns that leftist presidential candidate Luis Inacio Lula da Silva would raise spending and abandon a low-inflation policy in search of faster growth if he’s elected in October. He has a wide lead in polls.

Also scaring the markets was the announcement that Argentina’s central bank President Mario Blejer will resign five months after taking over the post. Central bank Vice President Aldo Pignanelli will take over the bank temporarily after the resignation June 30.

The plunge in Brazilian securities has raised concern the country is losing access to capital markets, making it hard for companies and the government to refinance debts. Brazil’s $330-billion public debt dwarfs that of Argentina, accounting for three-quarters of gross domestic product.

Bonds, stocks and currencies tumbled across the region for a second day as investors sold securities in a bid to limit potential losses in Latin America. Investors are worried soaring interest rates in Brazil may make it hard for companies and the government to meet obligations after Oct. 6 elections.

“The view of international investors toward Brazil is catastrophic,” said Rodrigo Campos at Opportunity Asset Management. “They don’t understand well the mechanism Brazil uses to roll over the debt. They just see we have a huge debt, high interest rates and a great political risk this year.”

Brazilian asset prices tumbled to their lows for the day after Treasury Secretary Paul H. O’Neill said the U.S. would oppose more International Monetary Fund aid for Brazil. He said the two-month slump in the country’s financial markets was due to political concerns, not economic ones.

“Throwing the U.S. taxpayers’ money at a political uncertainty in Brazil doesn’t seem brilliant to me,” O’Neill said.

Finance Minister Pedro Malan said in a speech Friday that Brazil’s economy is sound and that declines in the country’s bonds may be more closely related to sinking U.S. markets.

“Nothing really happened on the real side of the Brazilian economy in the past weeks that would justify a surge in the Brazilian sovereign risk,” Malan said. “I wouldn’t dismiss the possibility that some of this selling, mainly the larger volumes in most-traded bonds for emerging markets, is associated with soaring default rates in the U.S. corporate debt market.”

Brazil’s central bank president, Arminio Fraga, acknowledged that his efforts to stem declines in currency and bonds by selling dollars, exchanging Treasury bills and keeping interest rates high have failed so far. “The market hasn’t reacted yet the way I would like it to,” he said at a news conference in Sao Paulo. “The central bank has been acting daily and adjusting its policies.”

The Mexican peso declined 1.2% to 9.93 per dollar, while its stock index dropped 1.2% to 6,502.97. In Argentina, the peso fell 2.1% to 3.67 to the dollar and the Merval stock index fell 2.4% to 313.11. Chilean and Peruvian currencies also dropped.